7.1 Developing a Compensation Package
Human Resources departments are responsible for developing compensation packages. These packages align with the goals and rewards of the organization, and are intended to elicit behaviours in employees that contribute to the strategic gaols and performance of the organization. Compensation pays workers for work completed and provides incentives to motivate employees that results in loyalty and happiness on the job.
There are basic aspects of compensation packages to discuss before moving into the specific aspects of compensation. These foundations can assist in the development of a compensation strategy that meets the goals of your organization and is in line with your strategic plan.
Before beginning to work on compensation packages, some analysis should be done to determine the organization’s philosophy in regard to compensation. Before developing compensation philosophies, there are some basic questions to address:
- From the employee’s perspective, what is a fair wage?
- Are wages too high to achieve financial health in your organization?
- Do managers and employees know and buy into your compensation philosophy?
- Does the pay scale reflect the importance of various job titles within the organization?
- Is your compensation competitive enough to attract and retain employees?
- Are you abiding by the laws with your compensation package?
- Is your compensation philosophy keeping in line with labour market changes, industry changes, and organizational changes?
Once these basic questions are addressed, there might be “holes” in the compensation package and the company may want to begin to develop new philosophies in line with our strategic plan, which benefits the organization. Some possible compensation policies might include the following:
- Are salaries higher or lower depending on the location of the business? When looking at what to pay in a given country or area of a province different facets come into play…these could include cost of living in the area and fewer qualified people in a given area.
- Are salaries lower or higher than the average in your region or area? If the salary is lower, what other benefits will the employee receive to make up for this difference? For example, wages might not be as high, but offering flextime or free day care might offset the lower salary.
- Should there be a specific pay scale for each position in the organization, or should salaries be negotiated on an individual basis? If there is no set pay scale, how can you ensure individual salary offers are fair and nondiscriminatory?
- What balance of salary and other rewards, such as bonuses, should be part of your compensation package? For example, some organizations prefer to offer a lower salary, but through bonuses and profit-sharing, the employee has the potential to earn more.
- When giving raises, will the employee’s tenure be a factor, or will pay increases be merit-based only, or a combination of both?
Compensation Policy
Some organizations choose a market compensation policy, market plus, or market minus philosophy. A market compensation policy is to pay the going rate for a particular job, within a particular market based on research and salary studies. The organization that uses a market plus philosophy will determine the going rate and add a percentage to that rate, such as 5 percent. So if a particular job category median pays $57,000, the organization with a market plus of 5 percent philosophy will pay $59,850. A market minus philosophy pays a particular percentage less than the market; so in our example, if a company pays 5 percent less, the same job would pay $54,150.
Market Plus Philosophy
Cisco operates in the extremely competitive and rapidly changing high-technology industry. The Board’s Compensation Committee believes that the compensation programs for the executive officers should be designed to attract, motivate, and retain talented executives responsible for the success of Cisco and should be determined within a framework based on the achievement of designated financial targets, individual contribution, customer satisfaction, and financial performance relative to that of Cisco’s competitors. Within this overall philosophy, the Compensation Committee’s objectives are to do the following:
- Offer a total compensation program that is flexible and takes into consideration the compensation practices of a group of specifically identified peer companies and other selected companies with which Cisco competes for executive talent.
- Provide annual variable cash incentive awards that take into account Cisco’s overall financial performance in terms of designated corporate objectives, as well as individual contributions and a measure of customer satisfaction.
- Align the financial interests of executive officers with those of shareholders by providing appropriate long-term, equity-based incentives.
Market Minus Philosophy
There are many reasons why an organization would choose one philosophy over another. A market minus philosophy may tie into the company’s core values, as in Whole Foods, or it may be because the types of jobs require an unskilled workforce that may be easier and less expensive to replace. A company may use a market plus philosophy because the industry’s cutting-edge nature requires the best and the brightest.
Other internal pay factors might include the employer’s ability to pay, the type of industry, and the value of the employee and the particular job to the organization. In addition, the presence of a union can lead to mandated pay scales.
External pay factors can include the current economic state. Unemployment rates are a factor in this assessment. As a result of surplus workers, compensation may be reduced within organizations because of the oversupply of workers. Inflation and the cost of living in a given area can also determine compensation in a given market. Finally, government legislation such as the Employment Standards Act determines the minimum amount that can be paid to certain workers in Ontario.
Once an organization has looked at the internal and external forces affecting pay, it can begin to develop a pay system within the organization.
Think!
Think of your current organization or a past organization. What do you think their pay policy is/was? Describe and analyze whether you think it was or is effective. If you haven’t worked before, perform an Internet search on pay policies and describe/analyze the pay policy of an organization.
Human Resources departments need to design a compensation management plan to decide pay for all employees. There are four major steps to creating the company’s model.
- Guiding Principles: An organization needs to decide how they will manage pay. The compensation decisions are aligned with the mission, vision and values of the organization. Organizations may lead, match, lag in pay. Lead means to pay higher than that the market value. Match means to match other companies who have similar products and services. Lag means to pay less than market value. This is often called the organizational compensation philosophy. Other definitions are describes above with market plus and market minus philosophy.
- Job Analysis Assessment: As discussed in Chapter 4, job analysis leads to designing job descriptions and job specifications, standards related to the tasks, skills, education, experience for each job within a company. Human Resources reviews the job analysis results and compares jobs using internal and external equity.
- Job Value: Companies actually put a price on jobs similar to products. There are several job evaluation approaches to job pricing which are discussed in detail later in the chapter.
- Pay matching: All the data collected from steps 1,2, and 3 to match each employee to pay. Pay levels and pay groupings are created for each job in the company.
“7.1 Developing a Compensation Package” from Human Resources Management – 3rd Edition by Debra Patterson is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
